New York Markets After Hours

Yuan moves into spotlight after G-7

AllenWan

TOKYO (CBS.MW) - To revalue or not to revalue? That is the question not on Shakespearean scholars' minds but on those of currency speculators as the Chinese currency came back under the spotlight after last weekend's Group of Seven finance ministers' meeting.

It appears that Chinese monetary authorities are paying heed to calls to allow the yuan to appreciate, but not on the free-trading basis that many critics are calling for.

On Thursday, People's Bank of China governor Zhou Xiaochuan was quoted as saying that China's central bank has made reviewing its fixed exchange rate mechanism for the yuan a priority for 2004.

"We seek to maintain a fundamentally stable currency level that is rational and balanced," the Xinhua news agency quoted Zhou as saying at a People's Bank of China committee meeting on the nation's monetary policy for 2004.

His comments mark the first time Chinese monetary authorities have made the yuan issue a priority and indicate that the bank may allow the Chinese currency, which is fixed to about 8.28 to the dollar, to trade more flexibly on the currency market.

"It's hard to assess his comment's impact on the market, but his comments seem to signal that China understands the world's call for flexible exchange rate for the yuan and that China is beginning to meet those expectations," said Ryohei Muramatsu, senior currency trader at Commerzbank in Tokyo.

Ben Kwong, director at KGI Securities in Hong Kong, thinks that Zhou's comments imply a willingness on the part of China to allow the yuan to trade in a wider band against the dollar. "It may allow banks to use wider rates of adjustment but it may not be 5 percent," said Kwong.

He was referring a China Business Post report earlier in the week that the central bank may allow the yuan to appreciate by up to 5 percent next month. The central bank has denied the report.

"They want to alleviate pressure by saying that they are allowing for adjustments," said Kwong.

China's central bank has been on the defensive since the G-7 issued a key statement calling for "more flexibility" in exchange rates in major countries or economic areas that "lack such flexibility."

Dealers took that to mean Asian countries, especially China, whose currency has been pegged at around 8.28 to the dollar for the past decade - a time of booming economic growth in the country.

An undervalued yuan (some say it is around 20 to 40 percent cheaper than it should be) has allowed Chinese manufacturers to boost exports and help the country to build massive surpluses with nations like the United States, which has a trading deficit with the mainland at around $120 billion.

China is under enormous pressure to allow the yuan to appreciate as U.S. manufacturing jobs and exports remain hot-button issues ahead of November U.S. presidential elections.

Instead of any major changes to alleviate upward pressure on the yuan, Beijing has been tinkering at the edges. For instance, the government has reduced tax rebates for manufacturers, leading to a trade deficit in January for the first time in 10 months.

China worries that a yuan revaluation could undermine the country's wobbly banking system. Chinese banks have accumulated massive debts due to lending to state-run enterprises over the years. In the past few months, the government has announced measures to resolve the problem, starting by recapitalizing the top state banks in preparation for overseas stock listings.

Some analysts say China could choose to repeg the yuan to a basket of currencies by the end of the year.

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